Business Financial Information Secrets

How a Business Produces and Utilizes Critical Financial Information

Tage C. Tracy

• Publisher: Wiley
• Year: 2021
• ISBN:
  9781119779056
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

Gain a comprehensive understanding of how businesses produce, report, and utilize essential financial information!

In this companion to How to Read a Financial Report, 9th Edition, bestselling financial author Tage Tracy delivers timeless knowledge on one of the most important functions of every business operating within the free market. Designed for managers, entrepreneurs, investors, and others who deal with vital financial information and the production of financial statements & reports "on the inside, " Business Financial Information Secrets shows you how to produce, understand, and utilize financial information to the greatest effect for your business and the economy at large. This book guides you through the surprisingly clean and simple process of proper accounting and reporting, regardless of your organization's size or structure.

Cash flow and business capital management are covered extensively throughout the book as without a thorough understanding of these all-important concepts, you could be lacking critical information about the lifeline of your business. To sharpen your business skills and avoid preventable losses, read Business Financial Information Secrets. You'll learn everything you need to know about Profit & Loss Statements, Balance Sheets, and Cash Flow Statements, along with externally produced reports, additional internal financial information, and all the ins and outs of ensuring that reports are always 100% accurate. Topics include:

• Producing best-in-class financial information by learning finance terms, calculations, and standard reports
• Understanding where financial information originates and how it flows from one type of report to the next
• Analyzing financial information so you can generate meaningful insights for internal and external stakeholders
• Discovering why financial information is so critical and learning how to use it to your advantage
• Expanding your knowledge of how a business generates and consumes cash including the secrets to successfully raising debt or equity capital
• Deciphering how companies can "Engineer" financial results and when profits are real versus manufactured

Use this book for cost-effective solutions to provide reliable and timely financial information to shareholders, investors, lenders, analysts, government agencies, and beyond.

PART ONE
The What, When, and Where of Producing Best‐in‐Class Financial Information

CHAPTER 1
The Big Three Financial Statements

STARTING WITH A QUICK BACKSTORY

As we launch into the content and concepts presented throughout this book, I would like to begin by referring to a book my father and I coauthored, titled How to Read a Financial Report (now in its ninth edition). This book, first written by my father and published by Wiley over 30 years ago, has stood the test of time and represents one of the top “go‐to” technical accounting and financial references used by businesses, colleges, and organizations around the world. The book has so much useful information that you will find several overlaps and references to key financial and accounting concepts discussed in this book. However, there are also significant differences between these books that at heart are centered in the following two items:

• First, our book How to Read a Financial Report is centered on the premise of an external party (e.g., an investor, lender, etc.) evaluating or analyzing an organization from the outside looking in. That is, all the financial and accounting information produced has been done with the understanding that the audience will be external, independent third parties who are not privy to the organization's internal operations and related financial information and data. This represents a critical difference between this book and How to Read a Financial Report that will become evident moving through the material. The content of this book has been structured to look at financial and accounting information from the inside out with a heavy emphasis on business management (as opposed to adhering to guidelines, rules, and regulations established by external bodies or organizations such as the SEC).
• Second, How to Read a Financial Report is presented from more of a technical/accounting perspective or, for lack of a better term, a bit more black‐and‐white (as it relates to providing an understanding of accounting and financial concepts and how the big three financial statements are interconnected). This book is based on more of an internal business approach where, while it adheres to general or standard accounting rules and guidelines, its primary purpose is to assist with socializing accounting concepts, financial analyses and reporting strategies, and business planning from an internal operating or strategic perspective. Or, as I told my dad (a retired professor emeritus from the University of Colorado), “That is how you teach it in the classroom, but this is how it is done on the street.”

So, with this said, let's launch into our first topic on the big three financial statements, as there is no better place to start, making sure you have a clear understanding of the role and importance of the balance sheet, income statement (aka profit‐and‐loss, or P&L), and statement of cash flows. Large or small, for‐profit or non‐profit, corporations, LLCs, partnerships, or sole proprietorships, governments, or private businesses, legal or illegal, it doesn't really matter, as this basic concept is always present. That is, all operating entities need to produce complete, accurate, reliable, and timely financial statements on which to base sound business decision‐making.

THE FINANCIAL REPORTING BEDROCK

It should go without saying that business managers, company lenders and investors, regulatory agencies, and countless other parties need to clearly and concisely understand an organization's financial performance and results in a timely manner. This is common sense, no doubt, but you would be absolutely amazed at how often this basic concept is overlooked or, for lack of a better term, neglected, by even the senior‐most executive management teams. Maybe it is a result of ignorance, not having enough time, or just being lazy, but as we start our discussion on the big three financial statements, it should become abundantly clear just how important all three primary financial statements are and the key role each one plays.

Before we dive into a more detailed analysis of each of the big three financial statements, a quick overview of each financial statement and the related purpose is warranted:

• The balance sheet: The financial condition of a business is communicated in an accounting report called the balance sheet. In its simplest form, the balance sheet reports the assets owned by a business, the liabilities owed by the business (to third parties), and the net ownership equity (assets minus liabilities), all at a point in time.
• The income statement (AKA the Profit & Loss or just the P&L): The financial performance of a business that reports and measures its profit‐ or loss‐making activities is presented in an accounting report called the income statement. In its simplest form, the income statement reports sales, costs of goods sold, operating expenses, other expenses or income, and finally, whether a net profit or loss was generated and covers a period of time (e.g., 12‐month period of 1/1/20 through 12/31/20).
• The statement of cash flows: Finally, the last of the big three financial statements, and often the most important (but least understood), is the statement of cash flows. In its simplest form, this financial statement reports a business's sources (i.e., how a business generates cash), uses (i.e., how a company consumes cash), and net change in cash. Similar to the income sta...